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Another good sign: Private profits are soaring

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As first quarter earnings season continues to bring moderately good news for the nation's largest public companies, another good sign came from the land of private companies. On Monday, Sageworks reported that sales at U.S. private companies have grown at an annual rate of 8 percent, and net profit margins have risen to 7.8 percent.

While sales growth has slowed somewhat from 9.4 percent in the year ending April 2013, net profit margins have risen substantially, growing from 4.7 percent in the year ending April 2012 to 6.1 percent in 2013 and now 7.8 percent.

"The fact that companies are making so much money is a solid sign for further economic growth," said Sageworks analyst Libby Bierman.

From its work with finance professionals, Sageworks has developed a proprietary database of financial information, and it is from this data that it draws insights about the health of private sector companies overall.

Of course, Sageworks' findings are consistent with the strength we've seen in the earning of the nation's largest companies. Looking at the first 247 of the S&P 500 companies reporting first-quarter earnings, actual earnings were up 5.5 percent compared to the period last year, according to Thomson Reuters. And on the top line, reported revenues are up 4.3 percent.

"There is no doubt that companies for doing better," said Anthony Grisanti of GRZ Energy. "Whether this will translate to additional hiring remains to be seen. But certainly, all the conditions for an improving employment picture are there."

Earnings and the Economy

However, whether the news provides a fresh reason to invest in the stock market is a bit less certain.

"This data on profits fits into the theory that the overall economy is improving faster than most people believe, and I am also in that camp," said Jim Iuorio of TJM Institutional Services. "The real question is, can the stock market make a smooth adjustment to rallying on economic improvement as opposed to rallying solely on Fed accommodation?"

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Although Iuorio says the market may need "an adjustment period," he thinks that ultimately the answer to his question is yes. That's the reason he favors Russell 2000 futures over S&P 500 futures.

"I would be more interested in buying the Russell as it has already been hit, and seems like it should do well when 'risk on' returns," Iuorio said.

Needless to say, not everyone is so bullish.

"If profits are so good for private companies, then why are small cap stocks struggling so much this year? Usually I associate a pretty high correlation between private companies and the Russell 2000," said Brian Stutland of Equity Armor Investments.

"Last year, I felt the market was already pricing in strong earnings this quarter by racing small caps significantly higher in the second half of 2013. Right now, looking forward, the market is skeptical about the next six months or so, so I'd use some caution until we get closer to second quarter earnings before trying to catch the market off sides," Stutland said.

Some even argue that the high profit margins are a symptom of a broader problem.

"Private companies are enjoying a rise in profits due to the fact that they were forced into efficiency during the crisis," said Jeff Kilburg of KKM Financial. "Either having to let employees go or simply retooling to be able to do more with less, this uptick in profits was great for companies. However, this 'new normal'" will serve as a headwind on future U.S. job expansion."

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Still, Bierman points out that growth tends to beget further growth.

"The takeaway here is that they're going to be in a very good place to invest back into their companies—to amp up their businesses so they can grow," Bierman told CNBC.com. Overall, she foresees an environment in which it becomes "easier to sustain the level of growth that you're seeing."

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